Copper market continues to soar

Extraordinary things are happening in the world of copper. Last month, the
price broke through $10,000 (£6,200) a tonne for the first time. It has
continued to soar.

For power company E.On, the problem of copper theft has become so acute that it has hired former Gurkhas to guard electricity substationsPhoto: ALAMY

By Harry Wilson and Roland Gribben

9:56AM GMT 07 Feb 2011

In London on Monday the price touched $10,122 a tonne. The effects of this astonishing rise have rippled across the world. In Britain trains have faced delays as rail companies have struggled to fix power lines that have been attacked by thieves determined to strip them of their valuable copper.

For E.On the problem of copper theft has become so acute that the power company has begun hiring former Gurkhas to guard electricity substations. Even the Church of England has been moved to decry the cost to it of fixing the damage caused when thieves target their buildings.

Behind the price rise are a variety of factors, but by far and away the leading driver is China's economic boom. In 2010, Chinese consumption of copper increased by 38pc, with the country now accounting for about one-third of total global demand.

Asian demand as a whole last year hit 10.7m tons and is expected to exceed 11m tones this year, compared to combined European and North American demand in 2011 of 5.6m tons.

Copper miners have been ramping up production to meet the growing demand, but the International Copper Study Group still expects a global supply deficit this year of 400,000 tones.

The deficit is party a result of industry cutbacks instituted in 2009 that are still limiting production capacity. At the start of 2009 the world's copper producing capacity was 19.5m tons, but by the end of the year this had dropped to 16.1m tons.

The situation has not been helped by an explosion in December at the Chilean port of Patache, one of the main sea terminals for the country's exports of copper.

As the world's largest supplier of copper - Chile produces nearly one-fifth of the global total – the disruption to the country's exports added to fears over the ability of copper supply to keep pace with demand.

Analysts point out that some of the copper demand can be replaced by aluminium, but the latter is far from a perfect substitute. Because of aluminium's lower conductivity, telephone lines made from it must be wider, making them more expensive and this is without taking into account the higher costs because of the larger amounts of the metal that are needed to make the line.

Commodities trader Religare forecasts the London Metal Exchange price of copper could reach $11,000 a ton this year and adds its value could even spike above these levels at points.

Like any booming market, copper has attracted more than its fair share of speculators as investors see the potential to make quick profits from the metal's rising value.

Exchange traded funds have been big buyers and copper-backed funds are now among the largest commodity ETFs in the market. ETFs have often been blamed by other investors for ramping up prices as retail investors chase the next big thing, adding to the upward pressure on the price.

Fears have grown that a bubble is developing in the copper market and Morningstar analyst Daniel Rohr wrote an outlook on the copper market for 2011 titled 'Memo to Copper Miners: Enjoy it while it lasts' in which he argued that the metal's price was unlikely to remain at such a high level for more than a couple of years.

Mr Rohr points out that the world's 10 largest copper miners will be producing an extra 8.2bn pounds of copper by 2015, which he thinks will lead to global supply exceeding demand, resulting in a fall in the metal's price.

"How much copper will be world need in 2015? In our view, not enough to absorb all the additional supply, which is why we expect copper prices to decline toward the marginal cost of production," he wrote.

Commuters, electricity suppliers and the Church will be hoping that Mr Rohr is right and the copper price does fall back to a more normal level in the near future, bringing an end to the copper-stripping epidemic.

If he is wrong, then they are likely to be in for several more years of disruption as thieves continue to try and profit from the metal's sky-high price and relative scarcity.